Week in Review

June 4, 2018

Global Roundup

New U.S. tariffs are a bad sign for Brexit Britain’s trade deal hopes. When the U.S. announced steep tariffs on steel and aluminum imports from the EU, Mexico and Canada, it also offered a warning about Britain’s future in trade negotiations. (Quartz)

China’s economy is battling slowdown, earliest indicators show. China’s economy is refusing to slow down without a fight. That’s the picture that emerges this month from a new gauge of economic activity developed by Fielding Chen at Bloomberg Economics, which aggregates the earliest available indicators into one reading. (HSN)

Spain’s leader Rajoy ousted in no-confidence vote with socialist party gaining power. Spain has a new prime minister after a parliamentary vote June 1 led to the ousting of incumbent Mariano Rajoy. (CNBC)

China’s looming financial crisis. Governor of the Reserve Bank of Australia Philip Lowe’s speech last week highlighting the risks to the Chinese financial system from shadow banks—nonbank financial institutions often operating in more lightly regulated wholesale markets—has once again drawn attention to the major economic risk in China. (Interpreter)

Right-wing Duque leading Petro in Colombia election poll. Right-wing candidate Ivan Duque is holding onto his longtime lead over leftist Gustavo Petro, ahead of Colombia's presidential run-off on June 17, a poll published on June 1 showed. (Channel NewsAsia)

The populist coalition in Italy and its impact on European politics. The populist coalition of the Five Star Movement (M5S) and League is likely to rattle Italian and European politics with a new approach to governance, and risks fracturing relationships with the dominant powers on the continent—namely France and Germany. (Global Risk Insights)

Macri’s reform agenda under strain in Argentina. Street protests, conflict of interest scandals and plummeting poll ratings have combined to undermine Mauricio Macri’s authority even as the Argentine president tries to clinch a bailout package from the International Monetary Fund. (Financial Times)

Nigeria's central bank injects fresh $210 million into forex market to prevent shortage of dollars. From the money released, the bank injected the sum of $100 million to authorized dealers in the wholesale segment of the market while interests in the Small and Medium Enterprises (SMEs) segment received the sum of $55 million. (Business Insider)

Borrowing costs drop for Italy and Spain as political concerns ease. Italian and Spanish borrowing costs fell sharply on June 1 after anti-establishment parties in Italy revived a coalition deal, apparently averting snap elections, while in Spain socialist Pedro Sanchez took over as prime minister. (Reuters)

Trump tells Trudeau on NAFTA: U.S. will agree to fair deal or no deal at all. U.S. President Donald Trump issued a stern warning to Canadian Prime Minister Justin Trudeau on May 31, saying that the U.S. would either accept a "fair deal" on the North American Free Trade Agreement (NAFTA) or none at all. (The Hill)

Zimbabwe sets first post-Mugabe elections for July 30. Zimbabwe will hold presidential and parliamentary elections on July 30, President Emmerson Mnangagwa said on May 30, a vote he promises will be free and fair with international monitoring after the ouster of 94-year-old strongman Robert Mugabe. (Reuters)

Unhedged borrowing exposes Turkish companies to lira risk. The recent sharp decline in the Turkish lira is likely to increase the leverage of several Fitch-rated Turkish corporates if the new currency level is sustained or deteriorates further. (Fitch)

India’s growth recovery runs into emerging-market chaos. India is rebounding from an economic slowdown, with growth seen at more than 7%, only to find itself ensnared by the volatility engulfing emerging markets. (Business Mirror)

Italy edges toward populist-led government on second try. Italy moved swiftly toward a populist government on the second try May 31, after the leaders of the anti-establishment 5-Star Movement and the right-wing League announced a compromise deal on forming a political government. (Associated Press)

OK—So the Trade War Is Back on Now?

Chris Kuehl, Ph.D.

It is tempting to draw some parallels between the Donald Trump White House and Kansas weather. The old joke has been that if one does not like the weather in my home state, all one has to do is wait 10 minutes and it will change. Apparently, this saying can be applied to Trump’s trade policy.

Less than two weeks ago, the U.S. delegation that traveled to China came back with the declaration that the trade war was no longer an issue. It seemed that U.S. Treasury Secretary Steve Mnuchin and company had made some progress and had averted a nasty little set of tariffs and trade restrictions. Last week, that all seemed to go out the window again. Trump announced billions in tariffs on a wide range of Chinese exports. What accounts for these wild swings?

At the moment, there are two basic theories in play. The first is that President Trump waffles between two groups of advisors and changes his mind frequently according to which of these groups has his attention. There are the fiercely anti-China, anti-trade and nationalistic advisors who promote policies of isolation. This would include people like National Trade Council Director Peter Navarro, trade representative Robert Lighthizer and Secretary of Commerce Wilbur Ross. Then there are those who favor a nuanced set of policies that include trade pacts and the need to work with other nations for common goals. These would include Mnuchin, economic adviser Robert Kudlow and many in the GOP leadership. President Trump seems to shift back and forth between these positions according to how he thinks they play to his core base of support.

The other theory is that China is not necessarily living up to the promises it made at these meetings and the U.S. is holding its feet to the fire. This has been a common Chinese tactic in the past: Agree to all kinds of reforms and plans and then find excuses to drag the process out indefinitely. The U.S. may have expected China to be more forceful with North Korea and thus ensure that the summit between Trump and Kim Jong-un would take place. It has become apparent that this meeting is far more important to Trump than to Kim. He has staked his reputation as a dealmaker on it. If Kim walks away Trump loses face. If China made promises it has not kept, there would be reason enough to remind it of what is at stake.

On June 5, FCIB will present Doing Business in China from the perspective of two credit professionals who will share their expertise on how to assess and manage credit risk in the country. Click here to learn more about the webinar.

FCIB, NACM Offering New Dual Recertification

The Finance, Credit & International Business Association (FCIB) and the National Association of Credit Management (NACM) have joined education resources to help promote a dual recertification process for the International Certified Credit Executive (ICCE) and Certified Credit Executive (CCE) professional designations. Each recertification program will continue to be offered individually—the ICCE by FCIB and the CCE by NACM—however, members will now have the choice to renew both concurrently with the combined maintenance recertification.

A dual form makes it easier and saves time for credit professionals who have earned both designations. “Once you’ve been certified, your focus should no longer be on how to stay certified,” said past NACM-National Board of Directors Chairman Jay Snyder, CCE, ICCE, vice president of credit–Americas, Tech Data Corporation. “Instead, I think there should be a mind shift to maintaining the knowledge needed to keep the certification. Of course, this is done via remaining an active NACM and FCIB member.”

The dual recertification is a more streamlined process for those who have both designations. Rather than recertifying every three years to maintain the CCE and every two years for the ICCE, those with both can follow the dual recertification roadmap every three years.

“There is a fair amount of effort that goes into completing the recertification document,” said past NACM-National Board of Directors Chairman Gary Gaudette, CCE, ICCE, senior treasury analyst, Hypertherm, Inc. “It takes time to gather all the information, so doing this just once every three years for both certifications is going to be a time saver.”

The dual credential recertification form still requires education and participation segments to fulfill the requirements of maintaining the designation; 30 total hours (15 education/15 participation) are needed to maintain both designations. These hours can be completed through formal education; NACM and FCIB continuing education webinars and meetings; the Graduate School of Credit and Financial Management; publishing articles in Business Credit magazine; speaking at Credit Congress; earning awards and achievements; and contributing to the FCIB discussion board, to name a few.

“Any time things are easier, there is likely a positive response to it,” said Gaudette, adding that one recertification form for both designations could inspire others to pursue a certification that they don’t currently have.

More Efficient Allocation of Investment Is Key to China’s Sustainable Growth

World Bank

Economic activity in China remains resilient, with GDP growing by 6.9% in 2017 and 6.8% year on year in the first quarter of 2018. Consumption continues to drive growth. Growth is projected to moderate to 6.5% in 2018 and 6.3% in 2019-2020, according to the World Bank’s new China Economic Update released May 31.
“While China is on a long-term path of slower capital accumulation, investment growth has rebounded from the lows in 2017, particularly in the private sector,” said John Litwack, World Bank lead economist for China. “Real investment grew by just 5.5% in 2017 as compared to 18% per year in the decade before 2011. Nevertheless, the level and growth rate of investment are still high by international standards. The efficiency of allocation, and not the speed of growth, is China’s main investment challenge.”
China’s current account balance continues to fall as the economy’s dependence on exports declines. Mainly due to stronger goods and services imports, the surplus declined to 1.3% of GDP in 2017 and moved into a small deficit in the first quarter of 2018. In 2017, China also experienced more balanced capital flows. The Renminbi has continued to appreciate, weathering the emerging market turbulence in mid-April 2018 relatively well.
Monetary and regulatory tightening has already shown some results. Corporate leverage has stabilized below 160% of GDP in 2017. Several new measures, including an overhaul of the rules for asset management products, indicate the authorities’ commitment to addressing financial vulnerabilities.
Fiscal policy was accommodative in 2017, with growth in local government capital spending particularly strong. However, some of the increase in budgetary spending likely compensated for lower off-budget investments as implicit public borrowing through local government financing vehicles was restricted. While the projected 2018 consolidated fiscal deficit is similar to that in 2017, a stricter enforcement of measures to limit off-budget borrowing for public projects will likely imply a further tightening in the overall fiscal stance of general government.
Several factors are expected to slow the pace of economic activity in the near term: a relatively tighter monetary and fiscal policy mix, more moderate growth in global trade, continuing reforms to address industrial overcapacity and environmental sustainability, and measures to reduce the macroeconomic vulnerabilities accumulated in recent years. Rebalancing toward more consumption-and-services-led growth is also expected to continue.
While net exports contributed to growth in 2017, this contribution is expected to decline this year as global import demand moderates, says the report.
Moreover, rising trade tensions are one of the main risks to China’s outlook. The economic impact of recently announced U.S. trade measures would be manageable, but the costs of investment restrictions—in terms of limited access to foreign technology and skills—could be significant. The bigger risk for the world economy, as well as for China, would be a major weakening of the rules governing global trade and investment and an unraveling of global value chains.
“A measured response to the trade measures, consistent with WTO rules, and continued dialogue with the U.S. can minimize this risk," said Elitza Mileva, World Bank senior economist and the main author of the report.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations